PrimeEnergy Resources Corporation — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report. The company is a U.S. independent oil and natural gas producer and well-services provider, with properties primarily in Texas and Oklahoma. Financial statements are audited and presented in accordance with U.S. GAAP.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Oil and gas sales | $124.1 million | $73.1 million |
| Total revenues, including field services and derivatives | $125.1 million | $72.5 million |
| Income from operations | $59.7 million | $5.0 million |
| Net income attributable to PrimeEnergy | $48.7 million | $2.1 million |
| Basic / diluted earnings per share | $24.91 / $17.95 | $1.05 / $0.76 |
| Cash from operating activities | $33.1 million | $28.6 million |
| Capital expenditures, including exploration expense | $16.0 million | $20.7 million |
| Cash and cash equivalents at year-end | $26.5 million | $10.3 million |
| Bank debt at year-end | $11.0 million | $36.0 million |
- Oil and gas sales rose 69.7%, reflecting stronger realized prices and higher oil production. Oil volume increased 27.2% to 939,000 barrels; NGL volume was essentially flat at 417,000 barrels; natural gas volume increased 2.8% to 3.325 Bcf.
- Average unhedged realized prices rose to $96.70 per barrel of oil, $35.70 per barrel of NGLs, and $5.54 per Mcf of gas. Including derivatives, realized oil and gas prices were lower: $87.77 per barrel and $4.44 per Mcf, respectively.
- Net cash provided by operating activities increased $4.5 million. Investing activities provided $15.5 million, principally reflecting $31.4 million of property and equipment sale proceeds against capital spending. Financing activities used $32.4 million, including $25.0 million of net debt repayment and $7.4 million of share repurchases.
- At year-end, current assets were $72.2 million and current liabilities $41.0 million. The balance sheet reported $140.4 million of equity and $39.97 million of deferred tax liabilities. The credit facility had a $300 million commitment, but its borrowing base was $75 million at year-end and was reduced to $60 million in January 2023.
- Total proved reserves were 16.719 million Boe, up from 12.252 million Boe at year-end 2021; 62% were proved developed and 38% proved undeveloped. The standardized measure of discounted future net cash flows was $244.5 million, versus $135.8 million in 2021. This reserve-based measure is not fair value or a forecast of realized cash flows.
Material changes and unusual items
- Net income increased substantially, but included a $31.8 million gain on sale and exchange of assets, mainly involving undeveloped West Texas acreage. Oil and gas derivative results were a net loss of $12.0 million, compared with a $10.0 million loss in 2021.
- General and administrative expense increased to $20.2 million from $9.1 million, attributed mainly to higher employee count, compensation, and benefits. Lease operating expense increased to $37.8 million from $24.4 million. Interest expense fell to $0.9 million from $2.0 million.
- The company repurchased 91,077 shares for $7.4 million in 2022. Dividends are restricted by the credit agreement.
- At December 31, 2022, the company had $11 million outstanding on its revolving facility; it reported no borrowings and $60 million of availability as of March 31, 2023. Management said it was in compliance with credit covenants and expected continued compliance over the next 12 months.
Outlook, risks, and contingencies
- Management expects to invest approximately $78 million in 25 horizontal wells, with $32 million prepaid in December 2022 and an estimated $46 million of drilling and completion spending remaining in 2023. The filing expected these wells to come online mainly in the second quarter of 2023. Management also described a 2023 plan to drill and complete approximately 40 wells.
- Management outlined 42 additional West Texas drilling proposals requiring an estimated $200 million through 2024, plus potential later development. It described a roughly $400 million horizontal-development program over several years; these are plans and estimates, not committed expenditures. Management may reduce or adjust capital spending, sell non-strategic assets, or pursue joint ventures to preserve liquidity.
- Commodity prices, inflation and service costs, supply-chain constraints, drilling performance, reserve estimates, access to financing, borrowing-base redeterminations, and third-party transportation and processing capacity could affect results. The company noted that its 2022 capital program faced higher steel, diesel, and chemical costs.
- Customer concentration is significant: APA Corporation accounted for 55% of 2022 oil sales and 58% of gas and liquids sales. The company has no long-term purchase agreements with these purchasers.
- Key regulatory and environmental exposures include hydraulic-fracturing rules, produced-water disposal and induced seismicity, emissions and climate regulation, permitting, and plugging and remediation obligations. Asset retirement obligations totaled $15.4 million. Management did not expect environmental or other ordinary-course legal matters to have a material adverse effect; the filing reported no material legal proceedings.
- Derivative contracts can limit gains when commodity prices rise and expose the company to counterparty, production-volume, and basis risks. Derivatives are not hedge-accounted, so fair-value changes affect reported earnings. The filing disclosed 2023 swaps covering 114,200 barrels of oil at $74.07 and 377,000 MMBtu of gas at $3.87.
- Management reported effective disclosure controls and internal control over financial reporting. The external auditor issued an unqualified opinion on the financial statements; it did not attest to internal control effectiveness. Critical audit matters included reserve-sensitive DD&A and impairment estimates and asset retirement obligations.
Investor verification points
- Reconcile the large increase in earnings to the $31.8 million asset-sale gain, derivative losses, and recurring operating performance.
- Confirm well completion timing, production contribution, and remaining spending for the 25-well program; compare outcomes with management’s approximately 40-well 2023 plan.
- Track borrowing-base redeterminations, covenant compliance, cash generation, and funding needs for planned capital spending.
- Assess the sensitivity of reserves and the $244.5 million standardized measure to commodity prices, costs, development timing, and reserve revisions.
- Review customer concentration, hedge volumes and pricing, and exposure to commodity-price and basis movements.
- Check the filing’s detailed financial statements and notes for any apparent presentation inconsistencies before relying on individual figures; for example, the MD&A cites basic EPS of $24.91, while the financial statements separately report diluted EPS of $17.95.